{
  "title": "IMF Survey: Gulf Countries Limit Fallout from Crisis",
  "publication": "IMF News, March 12, 2010",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/soint031210a",
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  "summary": "Gulf Cooperation Council (GCC) countries have managed to contain the fallout from the global financial crisis, but the crisis has revealed financial sector vulnerabilities that need to be addressed, the IMF says.",
  "publishDate": "2010-03-12",
  "sections": [
    {
      "heading": "Overview and main findings",
      "content": "- GCC countries managed to contain the fallout from the global financial crisis, but the crisis revealed financial sector vulnerabilities that need to be addressed.\n- The authorities reacted swiftly and appropriately, and their response largely contained the effects of the crisis despite lingering uncertainties such as the Dubai World debt standstill announcement in November 2009.\n- Direct exposure of GCC commercial banks to U.S. subprime assets was relatively low, so direct impact from U.S. subprime assets was limited.\n- Banks continued to post profits throughout the crisis and overall impact on the financial sector was moderate."
    },
    {
      "heading": "Macroeconomic and financial context",
      "content": "- Oil prices declined from a peak of $147 in mid-2008 to a low of $34 in December of that year.\n- Oil GDP contracted in 2009; non-oil real GDP growth in 2009 was around 3 percent compared to 6 percent in 2008.\n- Private sector credit to nonoil GDP nearly doubled during the period 2003-2008.\n- Inflation rose from \"1-2 percent\" to two-digit levels prior to the crisis.\n- The UAE and Bahrain were among the countries most severely affected by liquidity reversals tied to foreign financing outflows.\n- Dubai represents only 10 percent of the GCC’s GDP; intra-GCC trade is about 10 percent of total GCC trade.\n- Some losses from asset-price declines can take up to 2-3 years to materialize on banks’ balance sheets."
    },
    {
      "heading": "Vulnerabilities identified",
      "content": "- High rates of credit growth (2003-2008) increased exposure to asset-price reversals and economic slowdowns.\n- Rising bank leverage and greater dependence on foreign financing (direct borrowing and \"hot money\") made banks vulnerable when short-term inflows reversed.\n- Overheating driven by strong economic activity and speculative capital inflows pushed up real estate and equity prices.\n- Currency pegs (all GCC countries except Kuwait) limit monetary policy flexibility because pegging imports U.S. monetary policy; business cycle divergence since late 2006 created policy tensions.\n- Two GCC countries have systemic nonbank financial institutions: Kuwait (investment companies) and the UAE (mortgage finance companies)."
    },
    {
      "heading": "Assessment of policy response",
      "content": "- Authorities used foreign exchange reserves and countercyclical fiscal policy to cushion the crisis; Saudi Arabia’s stimulus package was the largest (as a share of GDP) of any G-20 country.\n- Swift and comprehensive financial sector support measures helped maintain stability and public confidence.\n- The currency peg was maintained (Kuwait reverted to a basket of currencies in May 2007) because authorities judged benefits to outweigh transitory inflationary pressures."
    },
    {
      "heading": "Policy recommendations and reform priorities",
      "content": "- Immediate priorities:\n  - Ensure the cleanup of banks and nonbanks proceeds smoothly.\n  - Banks should recognize losses upfront and recapitalize where needed.\n  - Conduct forward-looking asset-quality monitoring, including stress testing.\n  - Monitor closely banks with exposure to real estate or systemic risk and enforce corrective action promptly.\n  - Facilitate restructuring of systemic and viable nonbank institutions and exit of nonviable ones.\n  - Put in place a more comprehensive, explicit legal framework for government intervention in banks and other financial institutions to enable efficient, cost-effective resolution and restructuring options.\n- Structural and longer-term reforms:\n  - Increase transparency and financial disclosure across GCC entities.\n  - Align policies to address both macroeconomic and financial sector stability.\n  - Develop local and regional debt markets to diversify financing channels away from banks.\n- Tools to prevent overheating:\n  - Monetary policy is constrained by the dollar peg.\n  - Fiscal policy should be less procyclical, though political economy pressures make this difficult in oil-rich countries.\n  - Prudential regulation and supervision (including reserve requirements) should be used and more strictly enforced to limit risk-taking and sectoral exposures."
    },
    {
      "heading": "Impact of Dubai debt standstill",
      "content": "- Main transmission channels: trade (limited) and financial (stronger through bank balance sheet exposure to Dubai property and construction markets).\n- Assuming the Dubai credit problem remains contained and resolution occurs rapidly, regional impact should be limited.\n- There are spillover effects on labor-exporting countries such as India and Pakistan due to Dubai’s employment of large numbers of workers from these countries.\n- Isolated advanced-economy banks were hit but none had systemic exposures.\n\nInterview published March 12, 2010. IMF Survey online. © International Monetary Fund.\n\n---\n\n Content in this bundle\n\n- Dp1001pdf (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- https://www.imf.org/en/News/country-focus\n- PRESS CENTER\n- IMF Survey Interview\n- IMF Country Focus\n- Read research summary in F&D\n- Dubai fallout contained\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/soint031210a"
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    "Published: March 12, 2010",
    "GCC countries managed to contain the fallout from the global financial crisis, but the crisis revealed financial sector vulnerabilities that need to be addressed.",
    "The authorities reacted swiftly and appropriately, and their response largely contained the effects of the crisis despite lingering uncertainties such as the Dubai World debt standstill announcement in November 2009.",
    "Direct exposure of GCC commercial banks to U.S. subprime assets was relatively low, so direct impact from U.S. subprime assets was limited.",
    "Banks continued to post profits throughout the crisis and overall impact on the financial sector was moderate.",
    "Oil prices declined from a peak of $147 in mid-2008 to a low of $34 in December of that year.",
    "Oil GDP contracted in 2009; non-oil real GDP growth in 2009 was around 3 percent compared to 6 percent in 2008.",
    "Private sector credit to nonoil GDP nearly doubled during the period 2003-2008.",
    "Inflation rose from \"1-2 percent\" to two-digit levels prior to the crisis.",
    "The UAE and Bahrain were among the countries most severely affected by liquidity reversals tied to foreign financing outflows.",
    "Dubai represents only 10 percent of the GCC’s GDP; intra-GCC trade is about 10 percent of total GCC trade.",
    "Some losses from asset-price declines can take up to 2-3 years to materialize on banks’ balance sheets.",
    "High rates of credit growth (2003-2008) increased exposure to asset-price reversals and economic slowdowns.",
    "Rising bank leverage and greater dependence on foreign financing (direct borrowing and \"hot money\") made banks vulnerable when short-term inflows reversed.",
    "Overheating driven by strong economic activity and speculative capital inflows pushed up real estate and equity prices.",
    "Currency pegs (all GCC countries except Kuwait) limit monetary policy flexibility because pegging imports U.S. monetary policy; business cycle divergence since late 2006 created policy tensions.",
    "Two GCC countries have systemic nonbank financial institutions: Kuwait (investment companies) and the UAE (mortgage finance companies).",
    "Authorities used foreign exchange reserves and countercyclical fiscal policy to cushion the crisis; Saudi Arabia’s stimulus package was the largest (as a share of GDP) of any G-20 country.",
    "Swift and comprehensive financial sector support measures helped maintain stability and public confidence.",
    "The currency peg was maintained (Kuwait reverted to a basket of currencies in May 2007) because authorities judged benefits to outweigh transitory inflationary pressures.",
    "Immediate priorities:",
    "Structural and longer-term reforms:",
    "Tools to prevent overheating:",
    "Main transmission channels: trade (limited) and financial (stronger through bank balance sheet exposure to Dubai property and construction markets).",
    "Assuming the Dubai credit problem remains contained and resolution occurs rapidly, regional impact should be limited.",
    "There are spillover effects on labor-exporting countries such as India and Pakistan due to Dubai’s employment of large numbers of workers from these countries.",
    "Isolated advanced-economy banks were hit but none had systemic exposures.",
    "[Dp1001pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/dp/2010/_dp1001pdf.pdf){rel=\"external\" type=\"application/pdf\"}",
    "[https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[IMF Survey Interview](https://www.imf.org/en/news/search)",
    "[IMF Country Focus](https://www.imf.org/en/news/country-focus)",
    "[Read research summary in F&D](https://www.imf.org/external/pubs/ft/fandd/2010/03/khamis.htm)",
    "[Dubai fallout contained](http://www.imf.org/external/pubs/ft/survey/so/2009/CAR120409A.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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